Semis Feel R&D Squeeze

Investors are increasingly rewarding semiconductor companies for short-term returns to shareholders, rather than long term R&D investments.

SAN JOSE, Calif. -- Investors are increasingly rewarding semiconductor companies for short-term returns to shareholders, rather than long term R&D investments, one Wall Street analyst said. If that's true, it marks a significant and unfortunate industry milestone.

"In the past not investing in R&D was a sign of no growth and poor ability to compete in the future," said the analyst who asked to remain anonymous so he could speak freely. The new view is the chip sector is not growing significantly, so "why keep throwing good money after bad?" he said.

Texas Instruments is the poster child of the new way of thinking. It bought back nearly $3 billion of its stock recently, pumping its share price up 40%. In a May 13 call with financial analysts TI's CFO laid out a new model that's already well in place of freeing up cash so it can pay greater dividends to shareholders. In the last five years, TI returned to shareholders 113% of its previous target, a cumulative $14 billion in profits.

A decade ago that cash might have bought a new fab or two, but not today. "Why invest in R&D if growth prospects are about 5% a year, ROI has fallen, and people need to adjust their investments," said the analyst.

"Every company is wrestling with this," he said. "The costs are rising on Moore's Law, and the potential returns are more difficult to generate -- you need to be an economist as much as a technologist these days," he added.

Intel stands on the opposite end of the spectrum from TI, still holding lots of big expensive fabs and still investing in them. Its short-term returns to shareholders have not been so great, but the tide may turn if Intel can make those investments pay off some day.

In the end there's a mismatch in the short-term time horizon of investors and the long-term horizon of chip companies. "Chip companies have to invest for way into the future," the analyst said.

I know advances in silicon technology are coming more slowly at greater cost. I can see how since the financial collapse of 2008, the sun seems to have set on the days of double-digit growth in semiconductors.

When you blend in this shift in investors rewarding short-term dividends over R&D investments, the new dynamics are making me reach for the Maalox bottle.

Eventually the second tier reaches 28 nm. If no one demands post-28 nm technology, because it's too expensive, certainly the habit of lowering costs will lead to the end of semiconductor technology leadership.

@resistion: I agree... in the longer run this trend will kill the Golden Goose that is giving the short term gains in the first place! The Semi industry is in a quandary -no one seems to have a clear strategy that nourishes a healthy R&D in the long term while keeping the short term-minded shareholders happy! And I don't see how the companies can do this while the industry is deeply entrenched in a suicidal pricing model.

@Rick: seems to me that the next generation technologies like Compound Semi, Graphene(?), etc., will have a difficult time attracting investors who are in for the long term. Many of these newer technologies are where Silicon used to be three decades ago. I do know that the US Government has been funding some of these but there needs to be investments with a long term vision for these from the commercial sector.

It's perfect timing for our rivals to catch up upon us. But so be it. The US should always focus on the top profit margin stuffs. As for the semi, whose profit margins are dropping year by year, let the Asians do it.

This behavior is typical when Management considers the business to be in the "cash cow" stage, meaning that it is a mature company with chances for innovation and differentiation largely behind it. This fits with an industry where generational improvements are increasingly expensive and the return on them are smaller.

From a business point of view the logic of this is defendable. The chip industry has defined innovation as smaller geometries and faster operation. Lately this has been modified to include lower power, but it is still a pretty narrow range of innovation. When is the last time that there was a fundamental breakthrough in semiconductors? What are the chances of that happening in the future?

Interesting thought @lidation but I don't agree, silicon is strategic...I am sure Asia wil happily take over semi business and start selling us chips in increasing quantities...and we should move on to what? social networking? financial services? artificial intelligence?

@krisi, I was being a bit sarcastic. I am truly aware of the strategic aspect of the silicon industry to our national security. However, sadly, what is happening is happening. I am with one of the major semiconductor manufacturing equipment companies. Most of our business are in Asia since nearly a decade ago because the manufacturing happens there.

We like it or not, the Wall Street folks don't care. Money talks - unless the government steps in.

I see your point @lidation...all manufacturing even for highly complex silicon chips is moving to Asia...and apparently many people in US are fine with this, I read this article in Bloomberg that this is a natural evolution like agriculture going away many years back...but I just have difficulty imaging this service society where you don't produce anything...your suppliers can squizze you anytime they want in such a situation but not seliing you chips or increasing prices 10 times...what are we going to do then? Kris